On March 28, 2023, the federal government presented its 2023 Budget.
The Budget proposes the following new measures intended to build a stronger, more sustainable and secure economy:
- facilitate intergenerational business transfers
- facilitate the use of Employee Ownership Trusts as an additional option for succession planning
- strengthen the General Anti-Avoidance Rule
- better target the Alternative Minimum Tax for High-Income Individuals
- invest in building Canada’s clean economy
Individuals
Grocery Rebate
Budget 2023 proposes to introduce an increase to the maximum Goods and Services Tax Credit (GSTC) amount for January 2023, which would be known as the Grocery Rebate.
The Grocery Rebate would be paid as soon as possible following the passage of legislation, through the GSTC system.
The Grocery Rebate would be in addition to the January maximum GSTC of $77. The maximum amount of Grocery Rebate would be:
- $153 per adult;
- $81 per child; and
- $81 for the single supplement.
Employee Ownership Trusts (EOT)
Budget 2023 proposes new rules, effective January 1, 2024, to facilitate the use of EOTs to assist in the purchase of a business by its employees without requiring them to pay directly to acquire shares.
A trust would be considered an EOT if:
- It is a Canadian resident trust (excluding deemed resident trusts.
- It holds shares of qualifying businesses for the benefit of the employee beneficiaries of the trust.
- It would make distributions to employee beneficiaries, where reasonable, under a distribution formula that could only consider an employee’s length of service, remuneration, and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.
- Is required to hold a controlling interest in the shares of one or more qualifying businesses.
- All or substantially all of an EOT’s assets must be shares of qualifying businesses. (A qualifying business would need to meet certain conditions, including that all or substantially all of the fair market value of its assets are attributable to assets used in an active business carried on in Canada and must not carry on its business as a partner in a partnership)
Budget 2023 would change the following tax rules specific to EOTs:
- Extend the capital gains reserve from five to ten years for qualifying sales to an EOT.
- Create an exception to the current shareholder loan rule, to extend the repayment period from one to 15 years for amounts loaned to the EOT.
- Exempt EOTs from the 21-year deemed disposition rule that applies to certain trusts.
Registered Education Savings Plans (RESP)
Budget 2023 proposes to increase limits on RESP Educational Assistance Payment (EAP) withdrawals from $5,000 to $8,000 for full-time students and from $2,500 to $4,000 for part-time students.
Individuals who withdrew EAPs prior to March 28, 2023 may be able to withdraw an additional EAP amount, subject to the new limits and the terms of the plan.
Budget 2023 also proposes to enable divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter.
These changes would come into force on March 28, 2023.
Retirement Compensation Arrangements (RCA)
A RCA is a type of employer-sponsored arrangement that generally allows an employer to provide supplemental pension benefits to employees.
Employers can choose to pre-fund supplemental retirement benefits through contributions to a trust established under an RCA.
A refundable tax is imposed at a rate of 50 per cent on contributions to an RCA trust, as well as on income and gains earned or realized by the trust. The tax is generally refunded as the retirement benefits are paid from the RCA trust to the employee.
Budget 2023 proposes that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA that is supplemental to a registered pension plan will not be subject to the refundable tax.
This change would apply to fees or premiums paid on or after March 28, 2023.
Budget 2023 also proposes to allow employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA trusts. The refund is limited to 50 per cent of the retirement benefits paid, up to the amount of refundable tax previously paid.
This change would apply to retirement benefits paid after 2023.
Registered Disability Savings Plans (RDSP)
A temporary measure allows a qualifying family member, who is a parent, spouse or common-law partner, to open an RDSP and be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt and who does not have a legal representative.
Budget 2023 proposes to extend the qualifying family member measure by three years, to December 31, 2026. A qualifying family member who becomes a plan holder before the end of 2026 could remain the plan holder after 2026.
Budget 2023 also proposes to broaden the definition of ‘qualifying family member’ to include a brother or sister of the beneficiary who is 18 years of age or older.
This proposed expansion of the existing qualifying family member definition would apply as of royal assent and be in effect until December 31, 2026. A sibling who becomes a qualifying family member and plan holder before the end of 2026 could remain the plan holder after 2026.
Alternative Minimum Tax (AMT)
Budget 2023 proposes several changes to the calculation of AMT:
- Broaden the AMT base by further limiting tax preferences (i.e., exemptions, deductions, and credits);
- Increase the AMT exemption from $40,000 to the start of the fourth federal tax bracket. Based on the expected indexation for the 2024 taxation year, this would be approximately $173,000. The exemption amount would be indexed annually to inflation; and
- Increase the AMT rate from 15 per cent to 20.5 per cent, corresponding to the rates applicable to the first and second federal income tax brackets, respectively.
The length of the carry forward would be maintained at 7 years.
Trusts that are currently exempt from the AMT would continue to be exempt.
Additional details will be released later this year. The proposed changes would come into force for taxation years that begin after 2023.
Intergenerational Business Transfers – Bill C-208
Budget 2023 proposes to amend the rules introduced by Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place.
A genuine intergenerational share transfer would be a transfer of shares of a corporation (the Transferred Corporation) by a natural person (the Transferor) to another corporation (the Purchaser Corporation) where a number of conditions are satisfied. The following existing conditions would be maintained:
- Each share of the Transferred Corporation must be a “qualified small business corporation share” or a “share of the capital stock of a family farm or fishing corporation”, at the time of the transfer; and
- The Purchaser Corporation must be controlled by one or more persons each of whom is an adult child of the Transferor (including grandchildren, step-children, children-in-law, nieces and nephews, and grandnieces and grandnephews).
Taxpayers may choose to rely on one of two transfer options:
- An immediate intergenerational business transfer (three-year test) based on arm’s length sale terms; or
- A gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics.
The limitation period for reassessing the Transferor’s liability for the tax that may arise on the transfer is proposed to be extended:
- By 3 years for an immediate business transfer.
- By ten years for a gradual business transfer.
Budget 2023 also proposes to provide a ten-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions.
These measures would apply to transactions on or after January 1, 2024.
Business
Investment Tax Credit for Clean Hydrogen
Budget 2023 proposes to introduce the Clean Hydrogen Investment Tax Credit (CH Tax Credit) with the following features:
- The levels of support will vary between 15 and 40 per cent of eligible project costs, with the projects that produce the cleanest hydrogen receiving the highest levels of support.
- The CH Tax Credit would be refundable. It could be claimed when eligible equipment becomes available for use.
- The CH Tax Credit will also extend a 15 per cent tax credit to the equipment needed to convert hydrogen into ammonia, in order to transport the hydrogen. The tax credit will only be available to the extent that ammonia production is associated with clean hydrogen production.
- Labour requirements will need to be met to receive the maximum tax credit rates. If labour requirements are not met, credit rates will be reduced by ten percentage points. These labour requirements will come into effect on October 1, 2023.
The CH Tax credit would apply to property that is acquired and that becomes available for use on or after March 28, 2023.
It will be phased out starting in 2034, with property that becomes available for use in 2034 subject to a credit rate that is reduced by one half. and fully phased out for property that becomes available for use after 2034.
Investment Tax Credit for Clean Technology Manufacturing
Budget 2023 proposes introducing a refundable investment tax credit for clean technology manufacturing and processing and critical mineral extraction and processing, equal to 30 per cent of the capital cost of eligible property associated with eligible activities.
Depreciable property that is used all or substantially all for eligible activities would qualify. Eligible property would generally include machinery and equipment, including certain industrial vehicles, used in manufacturing, processing, or critical mineral extraction, as well as related control systems.
Eligible activities would include:
- Extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements.
- Manufacturing of renewable or nuclear energy equipment.
- Processing or recycling of nuclear fuels and heavy water.
- Manufacturing of grid-scale electrical energy storage equipment.
- Manufacturing of zero-emission vehicles.
- Manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.
The credit would apply to property that is acquired and becomes available for use on or after January 1, 2024.
The credit would be gradually phased out starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034.
Clean Technology Investment Tax Credit – Geothermal Energy
Budget 2023 proposes to expand the eligibility of the Clean Technology Investment Tax Credit to include geothermal energy systems that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations.
Eligible property would include equipment used primarily to generate electrical energy or heat energy, or both electrical and heat energy, solely from geothermal energy.
Equipment used for geothermal energy projects that will co-produce oil, gas or other fossil fuels would not be eligible for the credit.
The proposed change would apply in respect of property that is acquired and becomes available for use on or after March 28, 2023, where it has not been used for any purpose before its acquisition.
The credit rate would remain at 30 per cent for property that becomes available for use in 2032 and 2033 and would be reduced to 15 per cent in 2034. The credit would be unavailable after 2034.
Zero-Emission Technology Manufacturers
Budget 2023 proposes that income from the following nuclear manufacturing and processing activities would qualify for the reduced tax rates for zero-emission technology manufacturers:
- Manufacturing of nuclear energy equipment.
- Processing or recycling of nuclear fuels and heavy water.
- Manufacturing of nuclear fuel rods.
This expansion of eligible activities would apply for taxation years beginning after 2023.
Budget 2023 proposes to extend the availability of the reduced tax rates for zero-emission technology manufacturers by three years, such that the planned phase-out would start in taxation years that begin in 2032. The measure would be fully phased out for taxation years that begin after 2034.
Investment Tax Credit for Carbon Capture, Utilization, and Storage
Budget 2023 proposes to enhance the Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS) to include additional design elements.
An Investment Tax Credit for Clean Electricity
Budget 2023 proposes to introduce a 15 per cent refundable tax credit for eligible investments in:
- Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors).
- Abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035).
- Stationary electricity storage systems that do not use fossil fuels, such as batteries, pumped hydroelectric storage, and compressed air storage.
- Equipment for the transmission of electricity between provinces and territories.
The Clean Electricity Investment Tax Credit would be available as of the day of Budget 2024 for projects that did not begin construction before March 28, 2023. The Clean Electricity Investment Tax Credit would not be available after 2034.
Tax on Repurchases of Equity
Budget 2023 announces that the proposed 2% tax would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.
General Anti-Avoidance Rule (GAAR)
Budget 2023 proposes to amend the GAAR as follows:
- A preamble would be added to the GAAR, in order to help address interpretive issues and ensure that the GAAR applies as intended regardless of whether or not the tax planning strategy used to obtain the tax benefit was foreseen.
- The threshold for the avoidance transaction test in the GAAR would be reduced from a “primary purpose” test to a “one of the main purposes” test.
- A rule would be added to the GAAR so that it better meets its initial objective of requiring economic substance. This rule requires consideration of a lack of economic substance in the determination of abusive tax avoidance.
- A penalty would be introduced for transactions subject to the GAAR, equal to 25 per cent of the amount of the tax benefit. The penalty could be avoided if the transaction is disclosed to the Canada Revenue Agency, either as part of the proposed mandatory disclosure rules or voluntarily.
- A three-year extension to the normal reassessment period would be provided for GAAR assessments, unless the transaction had been disclosed to the Canada Revenue Agency.
Commodity Taxes
GST/HST Treatment of Payment Card Clearing Services
Budget 2023 proposes to amend the GST/HST definition of “financial service” to clarify that payment card clearing services rendered by a payment card network operator are excluded from the definition to ensure that such services generally continue to be subject to the GST/HST.
Alcohol Excise Duty
Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2%, for one year only, as of April 1, 2023.
Cannabis Taxation – Quarterly Duty Remittances
Budget 2023 proposes to allow all licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter beginning on April 1, 2023.
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